Franchise News

This Mexican chain doesn't want to be the 'sexy' new Chipotle — and that's why it's winning

Del Taco isn't trendy or cutting-edge, and it doesn't have a quirky story. But the Mexican chain has managed to carve out a coveted spot in the restaurant industry between Taco Bell and Chipotle — and it's thriving there.
On Monday, the company reported preliminary fourth-quarter earnings, with revenue reaching $452.1 million in fiscal 2016, representing 6.6% growth from 2015. The company's stock soared 35% in 2016, with strong earnings in the second half of the year helping to propel it.
For comparison, Chipotle's 2016 was plagued by falling sales and a plummeting stock price. Revenue at the chain has fallen in the last four quarters since an E. coli breakout, and revenue in the most recent quarter was down 14.8% year-over-year.
"Fast casual" has become the coveted, aspirational tag line for restaurant chains eager to become the next Chipotle.
Instead, Del Taco has doubled down on food quality in recent years and has found success by embracing a model closer to that of traditional quick-service, or fast-food, restaurants.
"While fast-casual is kind of the sexy, hot thing, it's only 6% to 7% of traffic out there," Del Taco CEO Paul Murphy told Business Insider. "So, philosophically, we want to be able to steal share from [fast-food] competition and borrow share from fast-casual players."
In 2013, Del Taco launched a new strategy called "combined solutions" intended to boost the chain's reputation from fast food to what analysts call QSR-plus. Since then, the chain has worked to steadily build its reputation of having fresher and higher-quality food than fast-food competitors like Taco Bell while continuing to market to bargain-hunting customers.
Unlike many fast-food chains, Del Taco prepares all food on-site, from shredding cheese to grilling meat. Today, the chain maintains its "buck and under" menu but also serves more expensive handcrafted salads and plated Platos. As a result, the chain has attracted customers who tend to drift toward fast-casual chains: women, millennials, and other customers seeking premium options.
"People who aspirationally wanted to be [eating at] fast-casual chains all the time as they're getting a little bit older, as they're getting married, as they're buying a house — they're trying to stretch their dollar a little bit more or they're pressed for time," Murphy said. "We have the speed and the convenience of a drive-thru, but we also have good-quality food at lower price points."
Del Taco's slight remove from both fast-food and fast-casual chains has helped the company get a broader perspective on who the real competition is — not just Chipotle or Taco Bell, but also startups like Blue Apron and grocery chains like Whole Foods investing in ready-to-eat meals.
"I think that our industry needs to keep a sharp eye on grocery," Murphy said. "We can take the best parts. We don't need to be bleeding-edge on everything."
Del Taco isn't necessarily planning any dramatic moves in 2017.
Its expansion will remain in the single digits, with plans to go from middle to upper single digits in the coming years. Unlike Taco Bell, Del Taco's rollout of new menu items will continue to be measured rather than dramatic. Del Taco has found success in elevating its menu and brand, but it isn't going to rush the transition.
"We're very much in the early innings of this journey," Murphy said.